It’s common knowledge that U.S. companies are sitting on a large pile of cash. Moody’s estimates that pile to be worth $1 trillion. It must be a comfortable place to sit, too, because there seems little enthusiasm for whittling the size of the pile down.
There are a couple of reasons for U.S. corporations’ reluctance to spend the cash. First, the shakiness of the U.S. economy and the global economy in general makes cash a necessity for survival. Second, consumer demand has been so weak that it makes little sense to invest more in order to grow when a company isn’t running at full capacity anyway, and still can’t sell the products it offers.
Just a few examples of cash hoards at the end of the most recent reporting period should do the trick. Apple (NASDAQ: AAPL) is holding $25.62 billion (about $28/share); Cisco Systems (NASDAQ: CSCO) is sitting on $39.86 billion (about $7/share); Oracle (NASDAQ: ORCL) holds $23.64 billion (about $4.70/share); and Microsoft (NASDAQ: MSFT) is holding $36.56 billion (about $4.20/share). That’s more than $125 billion, more than one-tenth of the total, among just four companies. Just 20 companies hold more than a third of the total cash hoard.
An interesting paper on corporate cash begins with this sentence: “Left to their own devices, managers will waste corporate resources.” The paper notes that even Adam Smith pointed out that the separation of ownership and management leads to “negligence and profusion.”
But it’s nearly impossible to accuse corporate managers of negligence and profusion when they’re not spending their cash hoards. After all, when it seemed like the global financial system would collapse entirely, cash under the mattress was really the only safety net a company had. Credit was not available at any price for some companies and at high interest for the rest. Better to hold onto cash.
That crisis has passed, but high unemployment, stagnant wages, falling housing values, and a tepid global economy remain. For a long time now, U.S. consumers just weren’t spending any money. If no one is going to buy, why should companies expand? Corporate managers would indeed be negligent and profuse if they hired more people and expanded capacity in the teeth of all these negative factors.
Consumers aren’t spending because they’re worried. Companies aren’t expanding because there’s no reason to. Politicians are worried about short-term deficits and are not interested in more government spending to stimulate the economy.
Until something comes along to break that cycle, the cash will just keep stacking up.
